Berenberg ups Cobham target but says premium valuation "unwarranted"
Despite Cobham share's outperformance over the past six months, Berenberg cautioned clients about the near-term strength of various of the firm's end-markets, alongside operational challenges that would require time to resolve and, for a time, scupper hopes that the dividend would be reinstated.
Stock in the electronic solutions and aviation services provider had run 7% ahead of the Footsie during that time period, but the broker said its short-cycle cyclicality remained "challenging".
Berenberg said it had yet to see a recovery in multiple end-markets, including for marine Satcom, wireless and the lobger-cycle Australian fly-in, fly-out busienss, all of which led the broker to expect a "muted" third quarter trading update come November.
Then there were the challenges to the KC-46 tanker programme, where Berenberg spied the possibility of further programme slippage.
Furthermore, the booking of £200m of contract loss provisions over the coming three years would negatively impact on Cobham's free-cash-flow, Berenberg said.
As a result, while the broker did expect a "modest" dividend to be reinstated, it did not see that happening until fiscal year 2019.
Trading on a fiscal year 2019 price-to-earnings multiple of 19.8 and at 14.4 times its EV/EBIT, Berenberg estimated the shares were at a 20% premium to its UK aerospace and defence peers.
"This appears unwarranted given the operational and end-market challenges that face the business over the next 12 months. However, we believe market optimism over the recovery story will support current levels."
Berenberg reiterated a 'hold' recommendation on the shares and 130p target, with the latter being revised up from 120p beforehand.